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Wednesday, May 9, 2007

Nippon Steel eyes India tieups as sector girds against takeovers


Staff writer

In late March, Nippon Steel Corp. President Akio Mimura was in New Delhi to attend a board meeting for the International Iron & Steel Institute.

The meeting itself was nothing new. But it was reported a few days later that more interesting talks took place on the sidelines of the IISI meeting between Mimura and B. Muthuraman, managing director of India's steel giant Tata Steel Ltd.

Nippon Steel, the world's second-biggest steelmaker, refused to comment on what the two spoke about, but it admitted the two sides have started talks on increasing production to meet rising automotive sheet metal demand in India.

Nippon Steel's move is widely seen as an attempt to increase production for Japanese automakers starting to build factories in India via a tieup with a local steel company.

But market watchers also see it as an attempt by Nippon Steel to form a loose alliance with overseas steel manufacturers, especially in Asia, as fears grow that the world's No. 1 steelmaker, Arcelor Mittal, may try to buy out its Japanese rivals.

Atsushi Yamaguchi, senior analyst at UBS Securities Japan, commenting on Nippon Steel's talks with Tata, said, "It's because it doesn't want to be targeted for a takeover."

The takeover threat increased after Mittal Steel acquired Arcelor last June after five months of hard negotiations, creating a steelmaker three times as big as Nippon Steel in terms of annual production.

But Arcelor Mittal CEO Lakshmi Mittal, an Indian tycoon, seem to have just gotten started. He has openly stated he aims to further expand his empire.

Until a few years ago, almost all steel-sector mergers and acquisitions were friendly, aimed at boosting an ailing firm or to increase its shares through a merger. But since 2005, hostile takeovers surfaced as strategic attempts to expand business.

Before Luxembourg-based Arcelor was acquired by Mittal, it launched a hostile takeover bid on Canadian steelmaker Dofasco Inc., going into a bidding war with German steel company ThyssenKrupp AG. Arcelor won the bid and now Dofasco is under Arcelor Mittal's wing.

Growing takeover worries are prompting steelmakers to introduce defenses.

According to a report compiled by Nomura Securities Co. in March, 17.5 percent of all domestic steel companies listed on the market have introduced antitakeover measures, the highest rate out of 33 sectors surveyed.

In March 2006, Nippon Steel, Sumitomo Metal Industries and Kobe Steel agreed to consider counter measures if and when a hostile takeover bid is made. The three also agreed to a cross-shareholding arrangement.

In March, Japan's second-largest steelmaker group, JFE Holdings, introduced a scheme to defend itself from unwanted predators, enabling it to conditionally issue a substantial amount of shares to dilute the takeover firm's share.

However, UBS Securities' Yamaguchi dismissed the possibility that Arcelor Mittal or another foreign steelmaker may target major Japanese steel manufacturers via hostile takeover bids, noting they would have to pay a high price compared with manufacturers in other countries.

The corporate value of large Japanese steel manufacturers — a company's market value minus debt divided by annual steel production volume — is close to $1,600 per ton, while the global average is about $900 per ton, according to estimates by UBS Securities.

Foreign companies also tend to find the relations between Japanese steelmakers and carmakers too energy-consuming and thus unattractive, he added.

Unlike steel companies abroad, Japanese steel manufacturers dispatch engineers to carmakers to take part in joint research on new models and to gauge steel quality after they supply their products.

But smaller steel firms may still have to be on alert because they could easily become hostile takeover targets, said Norihide Tsuji, senior analyst at Shinko Securities Co.

"Midsize steelmakers with high-quality technology may be facing a risk" of takeover, Tsuji said. "That is why they want to tie up with bigger companies."

Small and midsize steelmakers' products play essential roles in Japan's manufacturing industry. For example, they make specialty steel for automakers for engines or blades for manufacturers to cut metal and other materials.

In the past year, Nippon Steel turned Sanyo Special Steel Co. into an affiliate, formed a strategic partnership with Chubu Steel Plate and made steel processing firm Hokkai Koki Co. a 100 percent subsidiary.

Industry insiders say the recent lifting of the ban on triangular mergers, which allow foreign companies more options to acquire Japanese businesses, will not increase the hostile takeover threat. But the threat nonetheless remains, because buyers in most cases would approach their targets with cash.

In triangular mergers, a Japanese unit of a foreign firm can take over another Japanese company by swapping the shares of its parent firm for all or a sizable portion of the target's shares.

"There are many investment funds eager to utilize their abundant cash," said Hajime Bada, chairman of the Japan Iron and Steel Federation.

Experts agree there is no way to defend Japanese steel companies from an unwanted buyer if a huge investment fund or cash-flush firm tries to buy them out or persuade shareholders to accept a takeover deal. In the meantime, the best way to pre-empt such action is to increase market value, communicate with shareholders and pay them satisfying dividends.

And that is what many companies are doing.

Backed by brisk financial results, Sumitomo Metal Industries said April 27 it will increase its yearend dividend for business 2006 from 7 yen per share to 8 yen.

Many steelmakers enjoyed a boost in profits for business 2006, which ended March 31. Nippon Steel's pretax profit has risen for five straight years, while Sumitomo Metal's rose 16.7 percent to 327.7 billion yen in business 2006.

JFE Holdings started to pay interim dividends last year. The business 2006 dividend jumped to 120 yen per share from 30 yen in 2003.

"One of our most important policies is to give benefits to our shareholders via dividends," said Toshikuni Yamazaki, vice president of JFE Holdings.



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